The Basics of TD Sequential

We make use of a few of Tom DeMark’s indicators. The Sequentials are designed to identify points of exhaustion in a trend. The following excerpts are taken from Jason Perl’s book, DeMark Indicators (Bloomberg MARKET ESSENTIALS: Technical Analysis).

Since the majority of people are trend followers, it’s hardly surprising that “the trend is your friend” is one of the most widely quoted trading mantras. While it may seem counter intuitive, given that most people do follow trends, TD Sequential attempts to isolate prospective exhaustion points in ranges, to anticipate market tops and bottoms when it believes prices are overbought or oversold and during trends when sentiment is invariably at an extreme.

Let’s look at the components of TD Sequential in order to understand how and why it manages to be so versatile. The indicator has two components: TD Setup, which relies on momentum to define price ranges, and TD Countdown, which is trend based, and looks for low-risk opportunities to fade established directional moves.

When a market a closes below (above) four bars earlier and then makes nine consecutive closes above (below) four bars earlier a Sequential Sell Setup is in place. (Inversely for a Buy Setup)

Since it compares the current close with the corresponding close four bars earlier, TD Setup has a momentum component, but, unlike more conventional momentum indicators such as RSI, TD Setup is dynamic.

Once a Setup is in place it is common to see a one to four bar pullback.

The countdown phase begins once a TD Setup is in place. TD Countdown compares the current close with the low two bars earlier for a potential buy and compares the current close with the high two bars earlier for a prospective sell. Once the count reaches 13 it is considered to have completed a termination count.

A Combo is similar to a Sequential countdown in that it waits for a Sequential Setup. However, TD Combo then begins the TD Buy Countdown, from bar one of the preceding TD Buy Setup

Aggressive traders can consider entering trades once a 13 Countdown is complete or more conservatively, once a price flip (closing beyond for bars earlier) is in place .